Bank of England holds fire on further emergency help for UK economy despite darkening outlook

Despite the increasingly bleak outlook, Bank of England policymakers announced no further help for the UK economy today.

The monetary policy committee kept interest rates on hold for the 41st month and maintained its quantitative easing scheme at £375billion, despite mounting evidence that the UK economy could be stuck in a rut of economic stagnation.

Figures yesterday showing an alarming decline in factory output in the eurozone, and the Bank was already under pressure to take emergency measures to kickstart a recovery after output figures released
since the MPC's July meeting revealed a sharper-than-expected decline in
output of 0.7 per cent.

Fears of Britain heading into an unprecedented 'triple-dip' recession were exacerbated by June's GDP figures and have led to calls for further monetary stimulus from the Bank of England

The key purchasing managers'
survey yesterday revealed the worst manufacturing performance in three
years in July, while initial reports have suggested the retail sector
was not receiving the Olympic Games boost to business previously
expected.

Today, however, another PMI survey showed the construction sector had returned to slight growth in July, after contracting at its fastest pace in two-and-a-half years in the previous month.

With the last £50billion tranche of QE cash yet to be spent, it was always unlikely that more QE would be announced.

Brian Hilliard of Societe Generale said, 'They have a stimulus already underway. I think they accept there's a speed limit on how quickly they can use an asset purchase program, so even if they are thinking of expanding it in due course, there's no point in ramping up the pace of purchase or the target now.

'At the Inflation Report press conference next week, King will stress - as he has for the past year - the damage from the eurozone crisis and the impact of that on growth and inflation forecast.'

The MPC, chaired by Bank governor Sir
Mervyn King, last month discussed the pros and cons of a further rate cut, but such a move was regarded as improbable.

Alan Clarke, UK and eurozone
economist at Scotiabank, said: 'The poor second quarter GDP data make it
hard for the Bank of England not to loosen monetary policy further.'

He added: 'However, we judge that a
further reduction in bank rate could backfire and hold back the creation
of new mortgages.'

A reduced rate would be the lowest in
the Bank's 318-year history, with a cut to 0.25 per cent saving a
borrower with an average lifetime tracker rate on a £200,000 mortgage
£328.56 a year, according to comparison site Moneyfacts.

But lower borrowing costs would
deliver yet another blow to Britain's savers, who have lost out since
rates hit their current historic low in March 2009.

The Bank's main concern over a rate
cut beyond 0.5 per cent is the impact it could have on some banks' and
building societies' ability to lend.

Lenders have assets, mainly
mortgages, with interest payments contractually linked to the Bank's
rate and a reduction below 0.5 per cent might squeeze some lenders'
interest margins to the point at which they become less able to offer
new loans to customers.

In its July meeting, the Bank raised
the notion that the new £80billion 'funding for lending' scheme aimed at
kick-starting bank lending could lessen fears about the impact of a
rate cut on the margins of lenders.

Market were more concerned with the failure today of the European Central Bank to follow up on its promises of direct action to stem the eurozone crisis. Chief Mario Draghi was still not able to elaborate on exactly how far the ECB would go to save the euro, saying only that its polices would become clear in the coming weeks.

Investors had been expecting more concrete detail and, disappointed also by the lack of another rate cut from he ECB, stock markets fell across Europe. The FTE 100 index lost 100 points within minutes in London, and the French and German blue-chip indices also dropped off a cliff.

That is the question: Would a base rate cut actually help or hinder mortgage lending?

The slump was even worse in the
eurozone where the manufacturing PMI crashed to 44 – the lowest level
since June 2009 – as Germany and France suffered along with Spain and
Italy. Peter Vanden Houte, an economist at Dutch bank ING, said: 'This
clearly indicates that the rot has now also affected the core
countries.'

The PMI figures are closely watched by central bankers and governments looking to assess the health of the economy.

Andrew Kenningham, senior global
economist at Capital Economics, said: 'The global economy, which slowed
sharply in the second quarter, has made a poor start to the third.

'Growth appears to have slowed in
most of the major advanced economies in July. The fitful global recovery
has once again run into serious difficulties – if, indeed, it can be
called a recovery at all.'

Hopes are also high that the European Central Bank is poised to take radical steps to save the euro later today. A pledge by bank boss Mario Draghi last week that he would do ‘whatever it takes’ to preserve the single currency dramatically raised the temperature ahead of its monthly meeting.

And although markets have opened calmly this morning, sceptical City experts warn they will dive if Draghi doesn't unveil a convincing plan of action this lunchtime, which it is hoped will encompass buying bonds of under-pressure countries. A further cut to the key interest rate is also a possibility.

The latest Markit/CIPS index of
activity in UK factories – where anything below 50 represents decline –
fell from 48.4 in June to 45.4 in July. It was the weakest reading on
the so-called purchasing managers' index since May 2009 and dented hopes
that the country will recover from the longest double-dip for more than
a half a century this summer.

Output was also down in the US as
well as in China and Japan as key Asian economies were buffeted by the
financial storm tearing through the eurozone. India, Asia's third
biggest economy behind China and Japan, saw growth slow, with the PMI
compiled by HSBC down from 55 in June to 52.9 in July.

'Asia is finally getting caught up in
the European mess with trade finally starting to buckle,' said Frederic
Neumann, an economist at HSBC. 'There is much more pain to come on the
export side.'

The JP Morgan Global Manufacturing
PMI fell to 48.4 in July from 49.1 in June – the second month of
worldwide decline in a row. Factories across the world cut jobs for the
first time since November 2009, the report said, adding that more job
losses could be on the way.

'Recent cost reductions are providing
some respite, but this will be of little long-term benefit if underlying
demand fails to pick up,' said David Hensley, director of global
economics at JP Morgan.

Threatened: Britain's AAA credit rating, which was confirmed at the weekend by ratings agency Standard & Poor¿s and hailed by Chancellor George Osborne as a sign his austerity drive is working